SAN ANTONIO—An individual claiming to be a member of Security Service FCU here is challenging how the credit union funds supplemental retirement benefits for its executives, questioning whether the credit union is appropriately using members’ money to fund those benefits.
CUToday.info obtained a copy of a letter sent to NCUA in which a “concerned member” claims $36.3 million was loaned by Security Service to certain executives to pay for collateral assignment split-dollar life insurance those same executives own. The arrangements are called split-dollar because the death benefits, cash surrender values, and premium payments are split between an employer and employee. In this case the credit union is loaning millions to the executives to buy life insurance policies. (See split-dollar explanation at right).
The anonymous letter questions the benefits to the credit union from making loans to executives it would not consider for members. The letter to the NCUA also asks why the benefits are then tax-free for the executives.
Collateral assignment split-dollar life insurance is used by many credit unions as a more affordable means of funding an executive’s supplemental retirement benefits, according to several sources, including CUNA Mutual Group. The loans are permitted under NCUA regulations, and CUNA Mutual said the programs provide credit unions with a solid option to lock-in talented executives in their final 10 to 15 years of their careers.
Yet some experts assert that loans to executives pursuant to split-dollar life arrangements may be questionable decisions for credit unions for many reasons, including potential difficulty collecting the CU’s collateral—the credit union’s portion of the death benefit—future performance of the insurance contracts, tenure of the executives, and the ownership of significant assets.
CU Loan To Cover Policy Premium
In the letter, the individual cites the $36.3 million listed in Schedule B of the SSFCU’s Sept. 30 2014, 5300 Call Report.
The person writes: “This is a type of life insurance product where Security Service has made a loan to one or more executives and those executives have used the loan to buy a life insurance policy. The life insurance policy has been assigned to Security Service as collateral on the loan. These executives can take funds from the policy that do not have to be paid back, nor do the executives pay any income taxes on these funds. Security Service does not receive its original loan back until the death of the executive.”
Scott Albraccio, CMG
One source speaking to CUToday.info on the condition of anonymity is concerned that with collateral assignment arrangements there are too many risks and variables over a period that may run decades, and that the credit union may not get back its investment in the future. Moreover, the credit union “imputes” the loan interest to the executives, so it never gets payments that it would get if the millions were loaned to members—the primary business of the credit union.
“If the policy performs substantially as projected, if the premiums are paid as planned, and the individual dies at the right time (or before), then the credit union will get its money back. But, if one or more of these things go wrong, the expectations of the credit union and the executive may not be met.”
The source also said the CU will face the “challenging” task of following the life insurance policy and its performance once the employee leaves the credit union.
“Someone at the credit union will have to track this for what may be decades following the exit of the executive. You could be looking at a 40-year-old piece of paper in some family file. Then someone at the credit union will have to explain to the late executive’s great grandkids and the board in place at the time who gets what. And that assumes nobody, including the insurance company, messes up the arrangement.”
Concerns 'Unfounded'
But Scott Albraccio, sales manager, executive benefits division with CUNA Mutual Group in Madison, Wis., said those kinds of concerns over split-dollar arrangements are largely unfounded. Albraccio explained that these arrangements are tightly written to address all potential issues the credit union could face in recouping its investment.
“Plan documents clearly state what happens ‘if . . .,’ and go through all the types of scenarios you could think of to protect the credit union’s interests, including voluntary or involuntary termination of the executive,” Albraccio said. “All this is spelled out in the plan documents that have nothing to do with the insurance policy itself.”
In an interview with CUToday.info, Security Service emphasized that the split-dollar arrangements it has loaned executives money for are carefully written to protect the credit union under all potential circumstances, including estate issues, and that the best insurance provider was chosen.
“It took us more than a year to decide on the vendor; we did a great deal of due-diligence to find the best choice. There are lot of good players in this space,” said J.T. Cody, Security Service EVP and general counsel, choosing not to disclose the name of the provider. “We wanted to fully vet the vendor and the investment. You have to make sure the firm you use as an administrator has a very sound program in place that will sustain the test of time. These investments require care and feeding for the life of the executive.”
Execs Qualify For Plan
Cody emphasized that the executives covered under the arrangements qualify for the insurance plans, saying each individual’s health was evaluated before the policies were issued.
Not only did the letter-writer share concerns for the use of the money, but also for how long it will take the credit union to get its funds back, asking why would it be in the “best interest of the membership to have a loan outstanding for decades waiting for an executive to die?”
Albraccio emphasized that with properly written split-dollar arrangements, the credit union will get back its entire investment back plus interest. He said that CUNA Mutual has 200 split-dollar policies in the CU marketplace today.
“They are looking for a supplemental executive retirement plan (SERP) that is more affordable—If the CU can’t afford to expense out millions of dollars towards a SERP,” said Albraccio. “If the CU doesn’t informally fund the plan they will take a direct hit as this is a compensation expense and would just be a write-off. The collateral assignment split-dollar plan, or an informally funded 457(f), is less of a strain on the financials.”
Marla Aspinwall, Loeb & Loeb LLP
Without naming their number or positions, SSFCU’s Cody explained that the executives who have been loaned the money for the split-dollar arrangements are key employees. “These are individuals at the top of their game. They are critical to the success the organization. What we are trying to do is retain our superstars, those who have the largest impact on the credit union.”
SSFCU Carefully Reviewed Options
Cody said Security Service looked closely at all other supplemental retirement options and felt split-dollar was the most advantageous for the CU.
“A lot of this just boils down to what kinds of benefits do you want to provide your executives?” Cody said. “Another way is just a straight deferred compensation plan, saying that at a given time you will give an employee a fixed amount of money.”
Over the past five years deferred compensation plans have drawn fire from various parties, as the payouts have markedly increased with tenured CEOs retiring at some large CUs.
Cody said Security Service felt a deferred compensation package was not the right fit for the credit union, as investments to fund such a plan, often in mutual funds, tend to me more volatile and therefore riskier than split-dollar.
“Insurance companies years ago recognized there was an opportunity here to share in some of that risk, so they structured these plans in a way that allows you to still get returns that somewhat follow market trends but also prevent you from taking a huge loss in the event of a serious market correction,” said Cody.
No Way Out?
But one analyst, Marla Aspinwall, a partner at Loeb & Loeb LLP in Los Angeles, in the white paper “No Way Out! Split Dollar Loans May Be Traps for the Unwary,” questions these investments, saying they are not the most economical method of providing the desired benefits.
“The economics of such arrangements generally require that they continue for a very long time, raising significant tax and accounting issues post-retirement and making them costly to unwind . . .,” wrote Aspinwall. “A life insurance policy must have substantial accumulated cash values in order to protect the employer’s interest in the policy during retirement while allowing the withdrawal by the employee of interest payments and retirement benefits. Many insurance brokers base long-term cash value projections on unrealistically favorable assumptions including favorable mortality charges, policy dividends and interest crediting to arrive at valiant projected benefit levels.”
But CUNA Mutual does not hold the same opinion, but does emphasize that split-dollar plans work best for employers and employees when given to leaders in the final 10 to 15 years of their careers.
Albraccio explained that the vast majority of split-dollar arrangements are written so that the premiums are paid within a 10-year period, fully funding the policy at that point.
Nothing More Than Retirement Plan
Albraccio reminded that regulations governing how much individuals can contribute to Social Security and 401 (K) plans limit highly compensated executives from reaching their retirement goals simply through those vehicles. Saying people are geared to retire on 60% to 80% of their pre-retirement income, Albraccio noted that those laws often have well-paid executives retiring on 30%-40% of their pre-retirement income, therefore needing supplemental retirement plans.
With senior executives needing additional options to fund their retirement, properly written split-dollar policies being an affordable option for the CU to fund those benefits, and the arrangements not uncommon within credit unions, Security Service questioned why the anonymous letter-writer would ask: “Why then are executives being provided something the credit union would never do for its own member-owners?”
“While a loan is involved, this is nothing more than a retirement plan, much like a pension plan,” said Cody. “And we would not offer a non-employee a pension plan.”